Most of our portfolios are fully invested at all times, and we manage risk through the total number of holdings, limiting the allocation to more speculative funds, and by allocating part of most client portfolios to multiple strategies including our Flexible Income strategy.
We also manage Tactical portfolios designed to increase and decrease equity exposure based on objective measures of current market risk. We use our Upgrading strategy for buy and sell decisions in all portfolios including our Tactical portfolios, but Tactical portfolios may also hold considerable cash, and their equity holdings may be hedged in a variety of ways based on our current observations of market risk vs. reward potential.
Our primary tactical model is a composite of risk measures (signals) based on valuations, investor sentiment, the strength of a market trend, market breadth, monetary conditions and the relative attractiveness of stocks versus bonds and cash. We weight our allocation decision based first on a composite score across the model’s signals, but we also may respond to divergences between the individual signals that shape the tactical model.
Our Tactical portfolios hold mutual funds and ETFs based on Upgrading, very similar to those held in a growth portfolio. We emphasize ETFs so we can more actively add or reduce equity exposure, and we can raise cash and buy or sell options to help manage risk exposure. We may also hold “inverse ETFs” that gain when a market index declines and decline when the index rises. Our Tactical Total Return strategy includes an allocation to our Flexible Income strategy.
